New Call For Reform of Disability Insurance Sector


Australia’s $5 billion disability income insurance sector needs urgent reform, according to the Actuaries Institute, noting that failure to implement significant changes “…will reduce consumer access to affordable disability cover in the future”.

The institute also highlights in a media release that product design, rating, advice, risk management, governance and regulation must be reviewed and that global comparison shows liberal benefits in Australia could threaten long-term viability (see also: APRA Sets New Course for IP Sustainability).

It has established a taskforce to identify where critical reform is needed and commissioned KPMG to compile a report Disability Income, An International Comparison, to help start the debate about changes needed to bring about a sustainable long-term solution that supports consumers.

The institute says the report found the sector needs simpler products, a reduction of ‘bells and whistles’, a change to definitions, and a review of the benefits to encourage those who can, to return to better health as soon as possible.

“Modern life insurance provides valuable financial benefits for people who can’t earn an income due to injury or sickness,” says Ian Laughlin, convenor of the Actuaries Institute’s Disability Insurance Taskforce.

Actuaries Institute’s Ian Laughlin … concerns for consumers, and the broader community, about future access to affordable DII cover.

“Australia has a very competitive market and customers have been offered a smorgasbord of product features. However, they have also been subjected to multiple unanticipated premium increases.

“A decline in insurance company profitability despite these steep premium hikes has called into question the sustainability of disability income insurance in its current form, and suggests the potential for market failure,” Laughlin says. ”That raises real concerns for consumers, and the broader community, about future access to affordable DII cover.”

The organisation says it has drawn on the skills of almost 50 actuaries to support its DII taskforce. It has started liaising with regulators, and hopes to engage with the director community, insurance company management, advisers, product ratings agencies and consumer groups to drive significant, long-term industry changes. It will also review the professional requirements for actuaries in the disability income insurance business.

The media release says that the KPMG report finds that individual disability income insurance does not adequately support a policyholder’s move back into work. The report also acknowledges increased concerns by Australia’s regulator about product sustainability.

It notes that the Australian Prudential Regulation Authority announced in December that it had written to industry participants in response to ongoing heavy losses in the market.

… Australian DII products have more features, higher issue limits, longer benefit periods and shorter waiting times than products on offer in the US and UK …

The KPMG report states that the Australian retail market offers more comprehensive DII cover to a broader range of occupations and target markets than the US, UK and South Africa. “Australian DII products have more features, higher issue limits, longer benefit periods and shorter waiting times than products on offer in the US and UK”.

Another issue raised in the report is rehabilitation support in other markets. “Data for 2017 from the UK indicates 3,000 employees were provided with services that allowed them to return to work before they were eligible for any payments. This includes services like counselling or physiotherapy.

“By contrast, in Australia there are limits on what early rehabilitation services can be offered to policyholders, particularly when the policy is written through a member’s superannuation fund. It is estimated only 20 percent of claimants access rehabilitation programmes, which have the potential to help claimants return to work, and help the industry become more customer-centric by offering a more holistic approach,” the media release says.

The Actuaries Institute notes that the report found:

  • Competitive pressure has resulted in products that are complex, making them difficult and expensive to administer
  • These products can be problematic to manage from a claims perspective
  • Guaranteed insurability has further aggravated sector problems by increasing the complexity of legacy business
  • Insurers have responded with increased premiums, perpetuating potential anti-selective lapses leading to worse claims experiences and falling profit margins

Daniel Longden, KPMG Actuarial and Financial Risk Partner, says in the release: “Our research found that Australian workers tend to have higher payouts than their counterparts in comparable jurisdictions. A replacement rate of 75 percent of earnings is quite common in Australia with up to 80 percent replacement ratios available. By contrast replacement rates in the US are generally 50-65 percent of income, and in the UK 60-65 percent of income.

… It describes product proliferation as an “arms race” …

The media release also notes that KPMG make a number of observations about the DII industry in Australia. It describes product proliferation as an “arms race”.

“Financial advisers use comparison tools that score products on the number of features and the generosity of the definitions. The more features and more liberal the definitions, the higher the score and the greater the likelihood an adviser will recommend the product,” it says.

It also states more Australians are working more than one job, but DII policies typically cover income lost from only one occupation. It says the industry needs to better reflect the way Australians work.

The institute says its taskforce will consider KPMG’s observations about the DII industry in its ongoing work.

Click here to see the full report.


  1. There is a need for reform across the board with regards to how the Life Insurance Industry has self destructed over the last 5 years.

    APRA has as much knowledge as ASIC had and to a degree, still has, which is very little, when it comes to how the Retail Life Insurance sector works in the real world.

    ASIC’s cure for the fabricated lies around churn, was to make it now near impossible to make it viable to provide advice and the results are now starting to show, with reduced New Business, a massive increase in premiums, instead of lower premiums and restrictive conditions imposed on advisers that will kill off the retail Life Industry unless there is a major overhaul of the LIF.

    On top of that, we now have another Government entity ( APRA ) who are looking to kill off any Best Interest Duty, or capability for advisers to look after their clients.

    Billions of dollars has been wasted, for NIL GAIN for Australians and here we are again, Groundhog day, same result, different jockey.

    The level of incompetence and lack of knowledge is quite frankly, incomprehensible.

    You did not need a crystal ball to see where this was all heading and I have spoken to clients that have NIL experience with the Life Insurance Industry, who can see what the problems are and the simple solution, yet all the supposed “”experts”” just do not get it.

    There must be an ulterior motive that we are not being told about, as quite frankly, the supposed cure for the supposed ailment, was and still is, a worst possible outcome.

    There are an army of professional idealists with no idea of what they are talking about, who unfortunately have the ear of decision makers and who are clearly, giving bad advice.

    As has been stated many times, the solution was always simple and still is, though from the latest APRA intervention, here we go again.

  2. What an enlightening report !
    Insurance has always been about the need, coupled with good health and capacity to pay the premium by the client … just in case.
    From an advisers point of view, the advice should have always centred around the benefits of the IP contract on offer, and the ability of the insurance company to pay a claim without the client going to a Current Affair, 60 minutes, or a good lawyer.
    We all know about those life companies who have done their best to avoid paying legitimate claims.
    That’s not the issue !
    The issue should have always been to target market who the company should offer reasonable contracts to with appropriate underwriting processes.
    The life industry as a whole has sacrificed those underwriting processes for the sake of premium income by offering the same products to everyone.

    Here’s the problem,…. now everyone wants to limit the payout of these contracts and is aided by an industry that now offers IP contracts with inferior terms and benefits.
    I suspect with the impact of current LIF legislation and other legislative impositions, no adviser worth his salt will offer an inferior contract to new clients and I suspect the new clients will weigh up the co-called limited benefits and opt not to purchase one.

    So where does that leave the life companies ?
    Well dwindling premium inflows will not prop up the legacy products on their books.
    Obviously it has been the “bent” of life companies to unilaterally increase the premium on their legacy products with the intent of pricing themselves out of the market.

    With fewer life companies operating in the market place, it will be interesting to see who is the last man standing ….and for how long.
    I’d like to give thanks to government, the FSC and others with an agenda for creating this environment.

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